Understanding The Types of Bonds

Google+ Pinterest LinkedIn Tumblr +

Beyond 007 James Bond, they are other bonds that seem to be super hush-hush secret but hopefully, by the time you finish,  a bond will mean more than the character that played in Goldfinger.

Bonds in the simplest terms are a portion of a loan that is made by the bondholder to the organizations such as corporations, cities, and the United States Government.  The entity that issues the bond is known as issuer. The issuer will pay back the bond and interest over the life of the bond.

Life of the bond or time period of the bond will vary.  Bond maturity is when the bond reaches the end of it period or lifespan that is stated by the organizations that issued it, and the bondholder is paid the face value of the bond.  Face value of bond is the principal of the bond.  Bonds can mature in 90 days or an investor could purchase bonds that mature in 30 years.

Unlike stock, there are several types of bonds, and the ratings of bond represent credit quality of a bond.  They are several types of bonds that exist; however, a majority fall in categories such municipal bonds, corporate bonds, and government bonds.

Municipal bonds are issued by local and state government entities, and in some cases no federal taxes are paid on municipal bonds.  Municipal Bonds are tax free and that could mean some municipal bonds could exempt from state, city, or federal taxes. They are few municipal bonds that could exempt from all three taxes.   Overall, these types of bonds are quite safe.

Corporate Bonds are issued by corporations and the credit quality of the bonds is based on if the corporate entity’s ability to pay off the bond.   Corporate bonds pay higher interests than municipal bonds.  The secondary market to buy and sell corporate bonds is huge. They are a lot riskier than municipal bonds because issuers are more prevalent to default on payment of the corporate bond.  Default means issuer does not pay off a loan or bond.

Government Bonds are issued by the federal government, and they are more commonly known as Treasury Bills, notes, and bonds.   Most government bills are issued at a minimum of 10,000 dollar, and usually sold at a discount.  The maturity will vary. Treasury Bills maturity can be 13-52 weeks long, notes maturity could be as long as 7 years and bonds maturity ranges 5-30 years.

The advantages of bonds are pricing of bonds are less volatile, and bonding rate provides investor with some reliability of their investment in bonds will be paid back when the bond reaches maturity. If an organization or company is liquidated the bondholder is paid before the stockholder. The disadvantages that exist when investing in a bond is the information that organizations used to determine the bond rating can be unreliable and rising interest rates can adversely affect the value of a bond.


About Author

Leave A Reply